Ping and Beyond: the CAT strikes down an absolute online sales ban

Introduction

In September 2018, The Competition Appeal Tribunal (CAT) rejected an appeal brought by Ping Europe Limited (Ping) a manufacturer of golf equipment against a decision by the Competition and Markets Authority (CMA) that it infringed competition law when it unlawfully banned two of its UK retailers from selling its custom-fitted golf clubs online. The CAT upheld the CMA’s ruling while slightly reducing the fine.

While the CMA has heralded this as a landmark ruling and a warning to manufacturers that absolute internet bans could be unlawful, on closer examination the case is as much about the facts as the law, and the true position appears more nuanced than might be thought at first sight. This alert summarises the background to the concerns in this area, the CAT’s statement of the law, the particular slew of factual findings which went against Ping, and considers the outlook for businesses in the future.

Background to internet restrictions and competition law

The European Commission’s concern with internet restrictions dates back to its adoption of “vertical agreements” guidelines in 1999. These saw the internet as a force for good in spreading low prices, and any restriction on its use by distributors as amounting to a restriction on “passive” sales in territorial terms, i.e. as an absolute ban that would be presumed unlawful under competition law. In recent years online selling restrictions have been a real focus for competition regulators across Europe with the European Commission pushing forward with its Digital Single Market plans and a number of similar cases coming from various EU Member States.

In bringing this appeal, Ping attempted to differentiate its position from these precedents by arguing that its custom-fitted golf clubs could not be sold online without an in store consultation and that a complete ban on online selling was necessary to protect physical retailers from free riding. Ping saw its case as going to “the freedom of a company to pursue a business when the business involves a sale of a product whose properties are fundamentally inconsistent with internet selling”.

The Appeal

In recognition of the importance of online sales channels, the CAT found that Ping’s online selling ban was an infringement of competition law ‘by object’ – meaning that it is so serious that effects on competition do not need to be shown. Although the CAT accepted Ping’s stated aim of promoting custom fitting as legitimate and genuine, the CAT considered that it could have been achieved through less restrictive means and that closing the account of any retailer that sold online was a step too far.

The key EU Court of Justice precedent which the CAT had to interpret was Pierre Fabre, a case about an internet ban for the sale of cosmetics, by means of a requirement that a qualified pharmacist had to be present to advise customers at the point of purchase. The CMA interpreted the law as meaning that where there was a legitimate objective to be achieved, the ban could only survive if it were objectively justified as necessary and proportionate to achieve that objective. In terms of whose burden it was to show this, it was for the CMA to show that alternative measures were available and for Ping to demonstrate that the ban was objectively justified by rebutting those alternative measures.

That is where the battle took place. The CAT accepted that the ban pursued a legitimate objective (promotion of custom fitting) and even that it was a suitable means to pursue that objective. The question was whether it was, objectively speaking, the only means, or the only reasonable means. The CMA suggested a series of alternative measures such as that in order to be part of Ping’s selective distribution network, Ping could require resellers to clearly promote in store fittings on their websites or not allow resellers that do not support in store custom-fitting into the distributor network. On the facts Ping was not able to rebut these alternatives.

The facts that went against Ping

The most striking aspect of the case was the weight of evidential factual evidence against the Company, from both its own witnesses and those of the CMA. Particular facts which played against it were:

First, a series of facts about what Ping and competitors actually did so far as non-bricks and mortar sales were concerned:

• Ping itself sold non-custom fitted clubs in its bricks and mortar stores, in significant quantities. That fact alone disposed of one of Ping’s arguments: that it was being forced to sell a product it did not wish to sell (non-custom-fitted clubs).
• In the US Ping did not prevent sales of golf clubs online.
• Ping sold custom-fitted clubs over the phone.
• Ping was the only competitor operating an online sales ban. Most other golf club manufacturers sold their products online where consumers could choose to specify their requirements using drop down menus. Some retailers also enhanced the online experience with live chat options to offer further personalisation and advice.
• Although Ping was a pioneer of in store custom-fitting, its process was not especially unique or different to other manufacturers.

Second, a counter-narrative to Ping’s arguments about the value of custom-fitting to consumers. There was growing demand for online purchases, with nearly 40% of Ping’s account-holders selling golf clubs on-line (presumably competitor golf clubs) and with these on-line sales accounting for nearly 30% of the revenue for those that did sell on-line. These are clearly significant numbers: no company is going to be able to defend an absolute ban as necessary in the face of them, given that its own service was found not to be unique or different.

Third, a finding that the ban actually had limited effectiveness in promoting custom-fitting. That was a finding based on detailed empirical analysis. And the Tribunal held that it went to necessity. How can it be necessary to achieve the goal if it doesn’t actually have the effect of achieving it? Again, Ping fell down on the facts.

Fourth, Ping’s “free riding” concerns were rejected on the facts. Ping had a concern that customers would go for a custom-fitting in one of the stores and then buy the clubs more cheaply on the internet if available, thus benefitting from the investment bricks and mortar stores make in the specialist service without paying for it. This concern is a perennial and important one which we return to below. It failed on the facts here because many retailers withheld specifications from customers that did not go on to buy in the store.

Comment and outlook

Faced with this weight of factual findings against it, it is not surprising that Ping lost the case. The issue for business going forward is whether this means any absolute internet ban is automatically going to be unlawful. In our view the answer to that question is clearly “no”. If it were that simple, there would be no need for the detailed factual analysis in the judgment. It is at any rate not that simple as a matter of law. An enquiry along the lines mentioned above is essential. Is the goal legitimate? Is the ban necessary to achieve it, or are there other means. They may not be as good, but do they reasonably achieve the legitimate aim?

As part of this, it is pertinent that the CAT did not reject the “free rider” defence outright; it rejected it on the facts. There is a recognition that this is a problem and might in principle provide a defence: the European Commission’s final report on the e-commerce sector inquiry similarly refers to this in the context of discussing online pricing questions (without, it has to be said, providing any guidance as to how it might be applied or whether it could be relied on more broadly) (see Law-Now). With internet shopping becoming more and more the norm, and the decline of the high street, this issue is going to have to be addressed – in future cases or in guidelines.

The analysis also clearly differs according to what exactly is banned. In Coty, the Court of Justice held that a ban on sales of cosmetic products to online trading platforms such as Amazon and e-Bay did not prevent the agreement from falling within the vertical agreements exemption from the prohibition on anti-competitive agreements, in other words that it was capable of being lawful (See Law-Now). That case was distinguished in Ping where the internet ban was absolute. There is also an issue about the kinds of products involved, though the level of relevance of that point is nuanced and may depend on the nature of the ban. Finally, and related to the nature of the ban, certain types of internet sites are viewed by the competition regulators and courts as particularly important to the process of competition. This is particularly the case for online shopping or price comparison sites – and indeed the fact that the ban meant that Ping’s clubs did not appear in such listings was an important feature of the judgment in this case.

Ultimately, this is a factual inquiry, against a rich seam of case law precedent, and with distributed burdens of proof as mentioned above. But there will certainly be cases where some form of internet sales restriction is justified. And so far as absolute internet selling bans are concerned, the default position must be that these will be hard – but not impossible - to justify.